The Chineese economy basics - MIsconceptions and realities.

1. China
Government role – Some Facts
Since 1949
Since 1949 the government, under socialist political and economic system, has been
responsible for planning and managing national economy. In the early 1950s, the
foreign trade system was monopolized by the state. Nearly all the domestic enterprises
were state-owned and the government had set the prices for key commodities,
controlled the level and general distribution of investment funds, determined output
targets for major enterprises and branches, allocated energy resources, set wage levels
and employment targets, operated the wholesale and retail networks, and steered the
financial policy and banking system. In the countryside from the mid-1950s, the
government established cropping patterns, set the level of prices, and fixed output
targets for all major crops.
Since 1978
Since 1978 when economic reforms were instituted, the government role in the
economy has lessened to a great degree.
• Industrial output by state enterprises slowly declined, although a few strategic
industries, such as the aerospace industry have today remained predominantly
state-owned.
• While the role of the government in managing the economy has been reduced
and the role of both private enterprise and market forces increased, the
government maintains a major role in the urban economy.
• With its policies on such issues as agricultural procurement the government also
retains a major influence on rural sector performance.
• The State Constitution of 1982 specified that the state is to guide the country's
economic development by making broad decisions on economic priorities and

2. policies, and that the State Council, which exercises executive control, was to
direct its subordinate bodies in preparing and implementing the national
economic plan and the state budget.
• A major portion of the government system (bureaucracy) is devoted to managing
the economy in a top-down chain of command with all but a few of the more than
100 ministries, commissions, administrations, bureaus, academies, and
corporations under the State Council are concerned with economic matters.
Each significant economic sector is supervised by one or more of these organizations,
which includes the People's Bank of China, National Development and Reform
Commission, Ministry of Finance, and the ministries of agriculture; coal industry;
commerce; communications; education; light industry; metallurgical industry; petroleum
industry; railways; textile industry; and water resources and electric power. Several
aspects of the economy are administered by specialized departments under the State
Council, including the National Bureau of Statistics, Civil Aviation Administration of
China, and the tourism bureau. Each of the economic organizations under the State
Council directs the units under its jurisdiction through subordinate offices at the
provincial and local levels.
Policy Making
• The whole policy-making process involves extensive consultation and
negotiation.
• Economic policies and decisions adopted by the National People's Congress and
the State Council are to be passed on to the economic organizations under the
State Council, which incorporates them into the plans for the various sectors of
the economy.
• Economic plans and policies are implemented by a variety of direct and indirect
control mechanisms.
• Direct control is exercised by designating specific physical output quotas and
supply allocations for some goods and services. Indirect instruments—also called
"economic levers"—operate by affecting market incentives. These included

3. levying taxes, setting prices for products and supplies, allocating investment
funds, monitoring and controlling financial transactions by the banking system,
and controlling the allocation of key resources, such as skilled labor, electric
power, transportation, steel, and chemicals (including fertilizers). The main
advantage of including a project in an annual plan is that the raw materials, labor,
financial resources, and markets are guaranteed by directives that have the
weight of the law behind them.
• In reality, however, a great deal of economic activity goes on outside the scope
of the detailed plan, and the tendency has been for the plan to become narrower
rather than broader in scope.
• A major objective of the reform program was to reduce the use of direct controls
and to increase the role of indirect economic levers.
• Major state-owned enterprises still receive detailed plans specifying physical
quantities of key inputs and products from their ministries. These corporations,
however, have been increasingly affected by prices and allocations that were
determined through market interaction and only indirectly influenced by the
central plan.
Total economic enterprise in China is apportioned along lines of directive planning
(mandatory), indicative planning (indirect implementation of central directives), and
those left to market forces. In the early 1980s during the initial reforms enterprises
began to have increasing discretion over the quantities of inputs purchased, the sources
of inputs, the variety of products manufactured, and the production process. Operational
supervision over economic projects has devolved primarily to provincial, municipal, and
county governments. The majority of state-owned industrial enterprises, which were
managed at the provincial level or below, were partially regulated by a combination of
specific allocations and indirect controls, but they also produced goods outside the plan
for sale in the market. Important, scarce resources—for example, engineers or finished
steel—may have been assigned to this kind of unit in exact numbers. Less critical
assignments of personnel and materials would have been authorized in a general way
by the plan, but with procurement arrangements left up to the enterprise management.

4. In addition, enterprises themselves are gaining increased independence in a range of
activity. While strategically important industry and services and most of large-scale
construction have remained under directive planning, the market economy has gained
rapidly in scale every year as it subsumes more and more sectors. [46] Overall, the
Chinese industrial system contains a complex mixture of relationships. The State
Council generally administers relatively strict control over resources deemed to be of
vital concern for the performance and health of the entire economy. Less vital aspects
of the economy have been transferred to lower levels for detailed decisions and
management. Furthermore, the need to coordinate entities that are in different
organizational hierarchies generally causes a great deal of informal bargaining and
consensus building.
Consumer spending has been subject to a limited degree of direct government influence
but is primarily determined by the basic market forces of income levels and commodity
prices. Before the reform period, key goods were rationed when they were in short
supply, but by the mid-1980s availability had increased to the point that rationing was
discontinued for everything except grain, which could also be purchased in the free
markets. Collectively owned units and the agricultural sector were regulated primarily by
indirect instruments. Each collective unit was "responsible for its own profit and loss,"
and the prices of its inputs and products provided the major production incentives.
Vast changes were made in relaxing the state control of the agricultural sector from the
late 1970s. The structural mechanisms for implementing state objectives—the people's
communes and their subordinate teams and brigades—have been either entirely
eliminated or greatly diminished.[47] Farm incentives have been boosted both by price
increases for state-purchased agricultural products, and it was permitted to sell excess
production on a free market. There was more room in the choice of what crops to grow,
and peasants are allowed to contract for land that they will work, rather than simply
working most of the land collectively. The system of procurement quotas (fixed in the
form of contracts) has been being phased out, although the state can still buy farm
products and control surpluses in order to affect market conditions.

5. Foreign trade is supervised by the Ministry of Commerce, customs, and the Bank of
China, the foreign exchange arm of the Chinese banking system, which controls access
to the foreign currency required for imports. Ever since restrictions on foreign trade were
reduced, there have been broad opportunities for individual enterprises to engage in
exchanges with foreign firms without much intervention from official agencies.
Though private sector companies still dominate small and medium sized businesses,
the government still plays a large part in the bigger industries. The fact that government
accounts for a third of the GDP shows this. Foreign owned companies hold significant
stakes. The public sector is mainly made up of State Owned Enterprises (SOE's).